The correct answer is: C
College fee today
= $18,000
College fee in
15 years' time
= 18,000 x 1.0315= 28,043
16 years' time
= 18,000 x 1.0316= 28,885
17 years' time
= 18,000 x 1.0317= 29,751
18 years' time
= 18,000 x 1.0318= 30,644
At t = 14, the value of these four-year fees, discounted at an interest rate of 4% is equal to
28,043
+
28,885
+
29,751
+
30,644
= 106,313
1.04
1.042
1.043
1.044
The future value of annual savings at t = 14 must be equal to $106,313
This is the future value of a 14-year annuity, where the annual payment is the amount that must be saved each year
Use your calculator to obtain the value of the annual payment
FV = 106,313
Interest rate = 4%
No. of periods = 14
Payment = $5,812